Beware the demographic death spiral

Every month we look at stunning statistics from the world of sustainability. What do they mean? What is the impact for investors? Today: ‘Death spiral demographics’.

Max

Schieler

Senior Country Risk Specialist at RobecoSAM

Unsustainable growth in the world’s population is normally a major cause for concern, along with uncontrolled immigration swelling national numbers. But what about countries facing a population decline? That’s just as bad for sustainability, and it’s occurring right at the heart of Europe, Robeco’s experts warn.

What has happened?

A study by Forbes magazine entitled ‘Death Spiral Demographics’ showed that Bulgaria’s population is expected to decline by an astonishing 27% by 2050, while Romania’s is seen falling by 22% and Poland’s by 14%. In the Eurozone, Italy faces the worst scenario with a population drop expected to be 5.5%, followed by Spain with 2.8%.

At the heart of the problem is a falling birth rate which has long been below 2 in most European countries, meaning the state loses the ability to replace those who die with new blood, combined with net migration as citizens flee poor economic conditions.

Why is it important?

Population issues are a factor in the Country Sustainability Ranking (CSR) produced by RobecoSAM to ascertain a nation’s scores on environmental, social and governance (ESG) factors. It can affect the ‘S’, since an ageing population presents pensions problems for governments, while a birth rate below 2 means the working population cannot be replaced (without immigration) as people retire. Meanwhile, increasing populations through immigration can raise social and political issues.

Germany’s population was set to drop by 7.7% due to a birth rate of only 1.4 before an influx of more than one million Syrian refugees in 2016 addressed some of the imbalance. Spain’s decline has been more attributable to net migration, particularly among young people fleeing youth unemployment rates of 24% to seek work elsewhere.

And after centuries of being the world’s most populous country, China is now facing a population decline of 2.5% by 2050, a loss of 28 million people. Japan’s decline is better known and steeper, with a loss of 15%, and more people aged over 80 than under 15. The biggest exception to the rule is the US, whose population is seen rising by 21% by 2050, due mainly to immigration.

What does it mean for investors?

Germany is a good example of how population decline can affect a country’s ESG score, which then feeds through into decisions over whether to buy the country’s government bonds. The country is ranked 13th place overall – behind peers such as the UK, whose population is rising – partly due to demographic challenges.

“As with other mature economies, demographic aging poses an important challenge, as projected employment and population will shrink over time, pointing to a rising dependency ratio and increasing age-related costs,” says Max Schieler, Senior Country Risk Specialist at RobecoSAM, in the October 2016 update to the Country Sustainability Ranking.

“This could (partly) be offset by improving employment opportunities for women and the elderly, but a large gender pay gap remains a hindrance. Immigration (including refugees) is also increasing the labor pool, but poses considerable integration challenges. It is currently one of the major political problems facing the nation as it is giving rise to anti-immigration sentiments and further fueling the populist right-wing AfD party which could result in undesired consequences in the 2017 election.”

Stunning statistics

Every month we look at stunning statistics from the world of sustainability. What do they mean? What is the impact for investors?